The U.S. economy will “re- accelerate” in 2008 leading North American stocks to new highs if the Federal Reserve Board makes additional rate cuts as expected, according to a new CIBC World Markets report.

“U.S. Main Street is fundamentally a lot healthier than Wall Street would have you believe,” says Jeff Rubin, chief strategist and chief economist at CIBC World Markets. “A two-quarter slowdown, contained by more Fed rate cuts, should set the stage” for increasing economic growth and a continuation of the five-year bull run on North American stock markets.

Until the soft patch is over, Rubin is moving to a more “defensive portfolio posture.” He’s cutting the bank’s “overweight” position in equities by three percentage points, and putting those funds into bonds.

Rubin is also reducing the bank’s weighting in financial stocks by a percentage point given the US$400 billion in subprime U.S. mortgages that are due for interest rate resets in 2008.

Financial stocks “continue to be the critical nexus between the U.S. subprime mortgage market and the TSX’s broad performance,” says Rubin.

Offsetting the reduction in financials, Rubin is moving to a modest “overweight” position in consumer staples, a segment dominated by major drug retailers.

Rubin is paring back his “overweight” stance in materials by one percentage point due to recurring cost overruns and project delays in both the gold and base metals sectors. He’s also maintaining his gold price target of US$900 over the next year, citing expectations of lower U.S. interest rates, a weak greenback, and strong overseas demand for the metal.

Mr. Rubin remains “overweight” in energy. “The red hot performance of China’s economy will help to keep demand growth on the boil there,” he says.

Also unchanged is Rubin’s “underweight” position in the telecom sector, which reflects drop-offs in private equity flows and efforts by Ottawa to spur competition in the wireless sector that could hurt the comfortable margins of established service providers.

Despite the TSX taking longer than expected to recoup recent losses, he’s maintaining a bullish forecast for the year ahead. “We continue to expect stocks to outperform other asset classes over a 12e month horizon. Our year-end target for 2008, of 16,200 for the composite, implies a year of double- digit gains, including the dividend. Consensus expectations for 2007 and 2008 earnings growth have been cut by about 1.3 and 0.8 percentage points respectively in the last month. The expected increases of 11% and 13% are still, however, well above the average 8 per cent growth rate of the last 25 years, with a 15% gain likely in the current quarter.